This time around, Square Inc (NYSE:SQ) has done much better with its earnings report, beating the top and bottom lines. Then again, it certainly helps that Wall Street set the bar fairly low for SQ. In after-hours trading, Square stock is up nearly 8%. This actually came after the stock posted a gain of about 4% before the market close.
Here’s a look at the Square earnings: Revenues spiked by 41% to $439 million, and the net loss came to 8 cents a share. On the other hand, the Street was looking for a more modest $406 million in revenues and a loss of 11 cents a share.
The outlook from the Square earnings report was also encouraging. For Q3, the company expects adjusted revenues of $167 million to $171 million, versus the consensus estimate of $166.3 million.
A key driver for SQ has been the increase in the volume from larger sellers on its platform (these are customers that generate over $125,000 in yearly volume). In the latest quarter, this segment saw volumes jump by 61%.
All great, right? Absolutely. But there remain some lingering issues with Square stock. Keep in mind that Wall Street has generally been skeptical that the company will achieve sustained GAAP profitability.
The reason? Well, the main reason is the company’s low fee structure. This is why Evercore ISI analysts recently slapped a $7 price target on Square stock. And while SQ has made aggressive moves to add new features to its platform — such as marketing services, home delivery and invoicing — the problem is that about 83% of revenues still come for payment transactions. Besides, there is one SQ business unit that could ultimately pose some serious risks — that is, the lending business.
While it’s true that the company has extensive analytics on its customers, the data has not been tested in a recessionary environment. So if there is a downturn in the economy — and there are already signs of slowing activity, such as with lagging GDP growth — then SQ could be subject to more losses. There have already been signs of strain from other online lenders like On Deck Capital Inc (NYSE:ONDK) and LendingClub Corp (NYSE:LC).
But Square stock could face headwinds from the intense competitive environment. Let’s face it, the company must fight against biggies like PayPal Holdings (NASDAQ:PYPL), Intuit (NASDAQ:INTU), First Data (NYSE:FDC) and VeriFone Systems (NYSE:PAY). There is also the threat from financial giants, such as JP Morgan Chase & Co. (NYSE:JPM) and American Express Company (NYSE:AXP). Even Starbucks Corporation (NASDAQ:SBUX) is a major player in the space!
Then there is the issue of CEO Jack Dorsey, who also is also at the helm of the beleaguered Twitter Inc (NYSE:TWTR). The fact is that very few people — except perhaps Steve Jobs — can make this kind of arrangement work.
But again, the performance of Square stock may prove to be temporary since expectations were not too exuberant ahead of the earnings report. There may be some technical factors at work as well. After all, the short sales were an astounding 67% of the float.
So it’s a pretty good bet that investors are scrambling to close out positions.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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